It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Index returned approximately 12.1% in the first 5 months of this year (through May 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Denbury Resources Inc. (NYSE:DNR).
Denbury Resources Inc. (NYSE:DNR) investors should pay attention to a decrease in support from the world’s most elite money managers in recent months. Our calculations also showed that DNR isn’t among the 30 most popular stocks among hedge funds.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Let’s view the latest hedge fund action regarding Denbury Resources Inc. (NYSE:DNR).
What have hedge funds been doing with Denbury Resources Inc. (NYSE:DNR)?
Heading into the second quarter of 2019, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from the fourth quarter of 2018. Below, you can check out the change in hedge fund sentiment towards DNR over the last 15 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Encompass Capital Advisors was the largest shareholder of Denbury Resources Inc. (NYSE:DNR), with a stake worth $15.4 million reported as of the end of March. Trailing Encompass Capital Advisors was Elm Ridge Capital, which amassed a stake valued at $5.7 million. Soros Fund Management, D E Shaw, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.
Since Denbury Resources Inc. (NYSE:DNR) has faced declining sentiment from hedge fund managers, logic holds that there exists a select few funds who sold off their entire stakes heading into Q3. At the top of the heap, Jim Simons’s Renaissance Technologies sold off the largest stake of the 700 funds monitored by Insider Monkey, comprising about $6.7 million in stock. Noam Gottesman’s fund, GLG Partners, also dropped its stock, about $1.2 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 4 funds heading into Q3.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Denbury Resources Inc. (NYSE:DNR) but similarly valued. These stocks are Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM), Knoll Inc (NYSE:KNL), Compass Diversified Holdings (NYSE:CODI), and Baytex Energy Corp (NYSE:BTE). This group of stocks’ market caps are similar to DNR’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| RYTM | 11 | 188006 | 1 |
| KNL | 19 | 55434 | -3 |
| CODI | 4 | 4172 | 0 |
| BTE | 10 | 41585 | -2 |
| Average | 11 | 72299 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $72 million. That figure was $44 million in DNR’s case. Knoll Inc (NYSE:KNL) is the most popular stock in this table. On the other hand Compass Diversified Holdings (NYSE:CODI) is the least popular one with only 4 bullish hedge fund positions. Denbury Resources Inc. (NYSE:DNR) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately DNR wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on DNR were disappointed as the stock returned -37.6% during the same period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
